Value-added electricity services: who should supply them and how?

Berkeley Lab has released a new report that discusses who should supply the new value-added services that are emerging in the electricity market – and what policies and regulations are needed to nurture this new market. The report applies to the U.S., but includes lots of lessons for Europe as well.

The value proposition of modernizing electric power distribution grids rests in part on harnessing the control and communications capabilities of new energy generation, storage, delivery, and consumption technologies to offer a broad range of value-added electricity services to retail electricity customers — for example:

In its Grid Modernization Initiative, the U.S. Department of Energy further highlights the importance of “adapting the existing regulatory system to give load-serving entities the opportunity to create sustainable business models while incorporating emerging technologies that provide value-added energy services to customers and the nation.”

But opinions differ on what constitutes a basic electricity service versus a value-added service. Also subject to debate is who should provide value-added services — utilities or third parties, or both, under what conditions, and how to treat utility costs for enabling these services.

Natural monopoly

Views diverge on whether utility provision of a new value-added service is dependent on whether the service is an extension of its natural monopoly functions or is independent of those functions. State law may dictate what additional services a utility may provide or, conversely, statutes may restrict participation by third parties.

The new report from Berkeley Lab presents differing viewpoints on the following questions:

What new value-added services does grid modernization enable, and what are the appropriate roles for utilities and third-party service providers? Should utilities directly compete with competitive providers of new value-added services, or provide new platforms and procurement mechanisms to enable third-party services?

What policy and regulatory changes may be needed in the face of increasing competition for electricity services from third-party providers?

How should regulators address utility costs for new value-added services, considering customers who do not participate in these offerings?

What policy and regulatory approaches best balance promoting innovation with consumer protection?

The report is written by authors representing the perspectives of: 1) utilities, 2) third-party service providers, and 3) consumers.

Perspectives

Jonathan Blansfield and Lisa Wood of the Institute for Electric Innovation (IEI) make the case that electric companies should be able to offer value-added services directly to customers, in partnership with technology companies, or both. From IEI’s perspective, utilities are best positioned to grow the market for these services and have the ability, willingness and mandate to serve all customers, regardless of income, location or class. Utilities also can optimize value-added services, such as targeting DERs for specific locations, as well as deploy services at scale, leading to lower cost for consumers.

In contrast, Ryan Katofsky, Benjamin Stafford and Danny Waggoner of Advanced Energy Economy (AEE) maintain that regulated utilities and competitive suppliers should not be competing head to head to provide the same value-added services to the same customers. In AEE’s view, services that can be competitive — those that do not exhibit monopoly characteristics — should be competitive in order to achieve the greatest benefits for consumers in the long run.

Nevertheless, AEE also concludes that utilities have an essential role to play in the provision of value-added services and should be rewarded for doing so. Further, AEE finds that value-added services based on technology deployed on the customer side of the meter should generally be the domain of the competitive market, subject to specific exceptions that utility regulators make on a case by case basis. This does not preclude the utility from engaging in revenue-producing activities that are connected to services delivered on customer premises. The organization emphasizes a market facilitation and development role for utilities as platform providers and avoiding utility advantages that could be achieved by shifting to ratepayers the financial risk of offering value-added services.

Generally, most National Association of State Utility Consumer Advocates (NASUCA) members believe that utilities should participate in providing potential competitive offerings, with certain regulations in place. These members recognize that utilities may be able to provide value-added services at lower costs to consumers. But not all NASUCA members agree. For example, in restructured states, some consumer advocates argue that utilities should not compete because they may be prohibited by law or should not be allowed to grow rate base by entering into new businesses.

In addition, NASUCA points out that regulated utilities have state oversight, whereas competitive providers may not be subject to similar regulations. Consumer advocates also envision possibilities for utilities to act as a system planner that maintains and builds infrastructure to enable a platform for certain value-added services offered by third-party providers. For example, utilities could connect buyers and sellers or act as independent distribution system operators.

Changes

The authors anticipate policy and regulatory changes needed in light of value-added services that modern grids enable, such as the following:

IEI

Rules to facilitate third-party engagement and a level playing field for all providers

Financial incentives for utilities to facilitate collaboration with third-party providers and to give utilities more options for revenue and earnings as they evolve away from a traditional business model based largely on capital investment

Pricing for any value-added services offered by regulated utilities should account for use of resources that customers pay for under basic service, and ensure the utility does not subsidize value-added services or earn outsized profits on them

NASUCA

Marketing flexibility or other allowances for utilities to help keep consumers connected to the grid and contributing to fixed costs

The webinar will be recorded and archived at FEUR.lbl.gov along with the report and slides.

The report is the ninth in the Future Electric Utility Regulation series from Berkeley Lab. Additional reports are forthcoming. Subscribe to our mailing list at FEUR.lbl.gov and follow us on Twitter at @BerkeleyLabEMP.

About Electricity Markets and Policy Group

Comments

Looking at this through European eyes: the monopoly provision of vital public services (electricity) by network operators that are largely privately owned (France not included in this statement) and thus mainly interested in profit which is generated on the basis of asset base. Nothing wrong with that, but, there have been plenty of court cases (Germany – TSOs) on what the return on the asset base should be. The writers at the end of the article talk about various forms or regulation. Fine in theory – but 20 odd years of practise suggests many/most/all Euro regulators are toothless and/or gutless (due to politicos ensuring that they are).

Example: Euro DNOs have a tendency (I’m talking first hand now) to get others to pay for their assets on which they then get a return – a modus operandi familiar to Al Capone. (e.g. Company X wants to connect 12MW of CHP, DNO Y claims this needs a new 132kV line). & for the sake of clarity – my 1st hand experience indicates that most DNOs usually attempt the “we need to build X to accommodate your Y” before agreeing that indeed, not much needs to be done & what does is on the client side. But to get to this point Company X needs to employ experts to mitigate the DNO protection racket – which in turn raises questions regarding the effectiveness of regulators and rules.

The lists of regulatory actions at the end of the article are interesting – but run into a Euro reality: network operators wanting to max out on returns & with little interest in behaving in an ethical way. Example: I proposed to one DNO that a client could use a fault current limiter to mitigate the impact of new generation on DNO fault levels. The DNO claimed no knowledge of fault current limiters despite the fact that it was running a project funded by the regulator to test………fault current limiters.

Euro DNOs now want to turn themselves into DSOs & “take a piece of the action” with respect to network services and/or the provision of services which could substitute for network reinforcement – which from a DNO point of view would be “unfortunate” (deliberate understatement) since it would impact on their ability to make money.

Given the current Euro “set up” DNOs should not be allowed anywhere near the provision of services on their networks. Furthermore, there should be a regulatory requirement that all network reinforcement be tendered out with respect to, for example: alternatives (storage, energy saving, embedded generation). This will generate all sorts of excuses from the DNOs – demonstrating that this is the correct direction to go in. Want innovation on power networks? maximise the number of players and ensure minimal involvement of existing DNOs. Or nationalise the lot of them and give them a public service remit.

Facilitating entrepreneurial entry into next generation electricity services is key. Barriers to entry in the business have fallen. Natural monopoly no longer holds. Industry structure as it exists is obsolete. Will regulators support entrepreneurial entry? Likely not. Will incumbent monopolists fight it? Yes. Whereas the industry is on the cusp of revolutionary change, once in a hundred years, the perspective here offered appears to be ho hum extension of what exists. Where is the thought leadership, Berkeley Labs?